Since 6 April (A-Day), many investors have been taking advantage of the new freedoms that have been designed to simplify and boost their retirement savings.
Members of company schemes can now also use the new freedom to take out self- invested personal pensions (SIPPs) and even invest shares from employee share schemes into their plans.
Even savers with more modest pensions can take advantage of the new rules, which include greater freedom to take out bigger tax-free lump sums.
Contributing more
High earners can invest their bonuses or windfalls into their pensions, now that the contribution limits make it easier. You and your employer can invest an amount equivalent to your annual salary each year and receive tax relief on the contributions up to a maximum of £225,000.
The annual limit will increase each year, rising to £255,000 by 2010. For most people this is much higher than the old limits, which were based on a percentage of earnings.
Bonuses count as part of your salary for pension purposes, and allowing your employer to pay your bonus straight into your pension has tax advantages. You do not have to pay tax on it and your employer won’t pay National Insurance. The company may be willing to share the National Insurance saving with you.
Multiple pensions
The new rules allow investors to save into as many pension schemes as they want at the same time.
Individuals in company schemes can now take out personal pensions alongside their occupational plans. Under the old rules, if you had a company pension and earned more than £30,000 a year you could not pay into a personal pension simultaneously.
Employee shares in pensions
It is estimated that there are more than 1m individuals saving in employee share schemes, which enable them to invest in their company’s shares at a discount.
Under the old rules, most people could not put these shares into their pension. But now that you can take out a self invested personal pension (SIPP) alongside a company scheme, this is a possibility that many are eager to explore.
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Cheaper life cover
Before 6 April it was possible to buy only a limited amount of life cover through a pension. But now the cap on contributions has been scrapped.
The advantage of buying a pension term-assurance policy is that you get tax relief on premiums. So a higher-rate taxpayer who is paying £100 a month into a policy needs to contribute only £60 of his or her own money. A basic-rate taxpayer needs to pay £78.
Making the most of a modest pension
Savers with smaller funds can now also take advantage of the new rules that allow funds worth no more than £15,000 in total to be taken as a lump sum.
Previously, only pensions worth less than £2,500 could be taken in this way. Anything above that had to be used to produce an income, usually using an annuity.
Taking bigger tax-free lump sums
Many workers are now able to take more of their fund as tax-free cash. Since 6 April, many have been able to take 25% of the value of their whole fund, including AVCs and opted-out benefits from the state second pension.
There is also greater flexibility over how you take your lump sum. For the first time, savers aged over 50 are able to take a tax-free lump sum from their schemes without having to retire or draw an income from the remainder of their fund.
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